5.
Price
and Wage
Developments
Graph 5.1
Recent Developments in Inflation
Consumer price inflation was 3.0 per cent over the
year to the June quarter, with seasonally adjusted
inflation in the quarter at 0.6 per cent, the same rate
as in the March quarter (Graph 5.1; Table 5.1). Some
temporary factors have added to inflation over the
year, so this rate slightly overstates the underlying
inflationary pressures in the economy. Nevertheless,
measures of underlying inflation have increased over
the past year, with higher tradables inflation offset in
part by lower domestic inflation pressures.
Consumer Price Inflation
%
5
5
Year-ended
4
4
3
3
2
2
1
1
0
-1
Declines in the prices of volatile items subtracted
from headline inflation in the June quarter, mostly
owing to a 2½ per cent fall in automotive fuel
%
0
Quarterly
2002
2005
2008
2011
2014
-1
Sources: ABS; RBA
Table 5.1: Measures of Consumer Price Inflation
Per cent
Consumer Price Index
Quarterly(a)
June
March
quarter 2014 quarter 2014
0.5
0.6
Year-ended(b)
June
March
quarter 2014 quarter 2014
3.0
2.9
Seasonally adjusted CPI
0.6
0.6
–
–
– Tradables
– Tradables
(excl volatile items and tobacco)(c)
– Non-tradables
0.4
0.7
2.9
2.6
0.5
0.7
0.0
0.5
1.2
3.1
0.8
3.1
0.8
0.6
2.9
2.6
0.6
0.6
2.7
2.7
0.7
0.5
2.8
2.7
Selected underlying measures
Trimmed mean
Weighted median
CPI excl volatile items
(c)
(a)Except for the headline CPI, quarterly changes are based on seasonally adjusted data; those not published by the ABS are
calculated by the RBA using seasonal factors published by the ABS
(b)Year-ended changes are based on non-seasonally adjusted data, except for the trimmed mean and weighted median
(c)Volatile items are fruit, vegetables and automotive fuel
Sources: ABS; RBA
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61
prices. However, over the past year volatile items
and tobacco have added to headline inflation,
largely reflecting the effects of the 12.5 per cent
increase in the tobacco excise in December last
year. The increase in excise contributed a little under
¼ percentage point to headline inflation over the
year; most of this occurred in the December and
March quarters.
The pace of underlying inflation increased in the
June quarter, with the published measures around
¾ per cent compared with around ½ per cent in the
previous quarter (Graph 5.2). More generally, the pace
of year-ended underlying inflation has increased, to
around 2¾ per cent over the year to the June quarter,
around ½ percentage point higher than over the
previous year.
Graph 5.2
Measures of Underlying Inflation
%
%
Weighted median
5
5
Trimmed mean
4
4
3
3
2
2
Exclusion-based*
Trimmed mean
(quarterly)
1
0
2002
2005
2008
2011
1
2014
0
*
Excludes fruit, vegetables, automotive fuel (and deposit & loan
facilities to June quarter 2011)
Sources: ABS; RBA
The increase in underlying inflation over the past
year has reflected a pick-up in tradables inflation.
Prices of tradable items (excluding volatile items
and tobacco) increased by 0.5 per cent in the June
quarter, to be around 1.2 per cent higher over the
year (Graph 5.3). This is the highest rate of yearended tradables inflation in around four years, and
contrasts with the declines in tradables prices seen
over most of that period.
Tradable items are either imported or relatively
exposed to international competition and, as a
result, their prices tend to be heavily influenced by
62
R es erv e Ba nk of Aus t r a l i a
Graph 5.3
Tradables and Non-tradables Inflation
%
Tradables*
%%
Non-tradables**
%
Year-ended
4
44
4
2
22
2
0
00
-2
2006
*
**
2010
-2 -2
2014 2006
0
Quarterly
2010
2014
Excluding volatile items (fruit, vegetables and automotive fuel)
and tobacco
Excluding deposit & loan facilities to June quarter 2011
Sources: ABS; RBA
movements in the exchange rate. The current level
of tradables inflation appears to be broadly in line
with what historical relationships would suggest
following the depreciation of the exchange rate
since early 2013. On average, a depreciation of the
exchange rate affects tradables prices for a period
of 2–3 years. However, the speed and size of passthrough varies between episodes, and quarterto-quarter volatility in tradables inflation can be
expected because pass-through typically does not
occur in a smooth fashion. In addition, it is difficult
to gauge the extent of pass-through precisely, as
other factors – such as labour costs, productivity
and demand – also affect tradables prices and these
effects may vary across items.
Indeed, recent movements in tradables prices have
varied across different expenditure groups. In the
June quarter, traded food and international travel
& accommodation prices increased noticeably.
In contrast, consumer durables prices declined
modestly, although the rate of decline recently has
been substantially less than it was a year or so ago.
Typically, the prices of consumer durable items
tend to move more closely with the exchange rate
than do those of most other tradable items. This
reflects a relatively high share of imported inputs,
and the fact that durable goods are more readily
transportable and are less subject to supply shocks
-2
than, say, food items, which are regularly affected
by weather conditions (Graph 5.4). However, liaison
suggests that retailers have been reluctant to pass
on price increases due to weak consumer sentiment
and the continued competitive environment. At the
same time, firms in the domestic distribution and
manufacturing sectors have been engaged in cost
reduction efforts for some time, possibly tempering
the pass-through of input cost increases to output
prices. These factors may have moderated inflationary
pressure on consumer durable items stemming from
the depreciation of the exchange rate.
Graph 5.5
%
%%
Domestic market
services*
8
88
6
2
0
-2
CPI consumer durables* %
(LHS)
-20
1
-10
0
0
-1
10
20
Exchange rate**
(RHS, inverted)
2005
2008
88
Administered
items***
%
8
66
66
6
44
44
4
22
22
2
00
00
0
2009
-2 -2
2014
2009
-2 -2
2014
2009
2014
-2
Excludes deposit & loan facilities to June quarter 2011, housing
services and domestic travel
** Includes rents, dwelling maintenance and new dwelling purchases;
excludes administered items
*** Includes utilities, education, child care, health services, property rates,
urban transport fares, postal services and some motor vehicle services
Year-ended percentage change
2002
%%
*
2
-3
Quarterly
Housing**
(seasonally adjusted)
Graph 5.4
-2
Year-ended
4
Consumer Prices and the Exchange Rate
%
Non-tradables Inflation
2011
2014
*
Retail items (excluding food and alcohol) and motor vehicles and parts
**
Import-weighted index, quarter averages
30
Sources: ABS; RBA
Inflation in the prices of non-tradables items has
slowed over the past year, in contrast to tradables
inflation. Non-tradables inflation was 0.7 per cent
in the June quarter, although this was above the
particularly low outcome seen in the March quarter.
Over the past year, non-tradables inflation was
3.1 per cent, its lowest rate in over a decade. In part,
the slowing in non-tradables inflation is likely to
reflect the subdued conditions in the labour market.
This is perhaps most evident in market services,
which tend to have a larger labour cost component
than many other non-tradable items (Graph 5.5).
Sources: ABS; RBA
Housing cost inflation appears to be only weakly
related to broad measures of labour costs, with
changes in the demand and supply of new housing
and rental properties more important determinants.
Housing cost inflation rose in the June quarter,
driven by a pick-up in inflation in the cost of new
dwellings, consistent with the high level of building
approvals for detached houses (Graph 5.6). Over the
year, new dwelling cost inflation has been strongest
in Sydney and Perth, in line with the larger pick-up
in construction apparent in those states. Meanwhile,
quarterly rent inflation declined to its slowest pace
Graph 5.6
Housing Cost Inflation
’000
35
%
8
Building approvals*
(LHS)
30
6
25
4
20
(RHS, year-ended)
%
1
%
8
Vacancy rate
(LHS, inverted)
2
3
6
4
Rents inflation
(RHS, year-ended)
4
5
2
New dwellings inflation
2002
*
2005
2008
2
2011
2014
0
Private detached housing
Sources: ABS; RBA; REIA
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63
since 2003, despite vacancy rates remaining fairly
steady at a below-average level in recent quarters.
Inflation in the prices of ‘administered’ items –
those with regulated prices or for which the
public sector is a significant provider – increased
in the quarter, driven by changes to private health
insurance premiums and rebates in April.
The divergent trends in tradables and non-tradables
inflation have seen an adjustment in relative prices,
which is expected to continue for some time. This is
an important aspect of the rebalancing of demand
and prices given the decline in the terms of trade
and the ongoing transition from the investment to
the production phase of the mining boom. Nontradables prices typically grow at a faster rate than
tradables prices and so the ratio of non-tradables
to tradables prices rises over time (Graph 5.7). Over
the past decade, the difference between the average
inflation rates of non-tradables and tradables prices
was larger than in the past. In large part, this change
in the trend of relative prices was in response to
the substantial rise in the terms of trade over that
period. The higher terms of trade acted to bolster
demand for labour while the addition to incomes
increased demand for non-tradable goods and
services. In addition, the associated appreciation
of the nominal exchange rate reduced demand for
some domestically produced tradable items and also
Graph 5.7
Ratio of Non-tradables to Tradables CPI*
March quarter 1987 = 1, log scale
ratio
lowered import prices and tradables inflation. Over
the past year, however, these forces have partially
reversed, as the terms of trade declined and the
exchange rate depreciated somewhat. In response,
tradables prices have increased, while weak growth in
unit labour costs has contributed to a decline in nontradables inflation. As a result, the ratio of tradables to
non-tradables prices has increased at a rate more in
line with the trend prior to the resources boom.
Costs
Wage growth has remained low, with the wage
price index increasing by 2.6 per cent over the year
to March, which was around 1 percentage point
below its decade average growth rate. In the quarter,
private sector wage growth remained subdued,
with reports from liaison continuing to suggest that
labour is readily available and the rate of employee
resignations is low (Graph 5.8). Although public
sector wages grew at a slightly faster pace than
expected in the December and March quarters,
growth over the past year has been around the
lowest in over a decade.
Graph 5.8
Wage Price Index Growth
%
Private sector
5
55
5
4
44
4
3
33
3
22
2
11
1
Year-ended
2
1.75
Quarterly
1
1.50
1.50
Trend
1982–2003
1.25
*
1995
2000
2005
1.00
2015
Tradables inflation excludes volatile items (fruit, vegetables and
automotive fuel) and tobacco; non-tradables inflation excludes deposit
& loan facilities to June quarter 2011
Sources: ABS; RBA
64
2010
R es erv e Ba nk of Aus t r a l i a
0
2002
Source:
1.25
1990
%
Public sector
ratio
1.75
1.00
%%
2008
00
2014
2002
2008
2014
ABS
The increase in spare capacity in the labour market
over the past two years or so, as indicated by the
increase in the unemployment rate and various
measures of underemployment, has contributed to
the significant reduction in wage growth over this
period (Graph 5.9). Concurrently, there has been
0
Graph 5.10
Graph 5.9
%
6
Wage Growth and Unemployment
%
%
Wage growth by
industry
(quarter average)
5
4
4
5
Mining
Other
industries
4
3
3
Wage price index
Business
services
(year-ended growth)
2006
2008
Year-average
6
5
2
%
Unemployment by
former industry*
Year-ended
6
Unemployment rate
3
Industry Wages and Labour
2010
2012
2014
2
2
Sources: ABS; RBA
a decrease in workers’ sense of job security, which
may be contributing to lower wage demands, while
employers have faced increased pressure to contain
labour costs. In particular, in a number of private
sector industries, subdued trading conditions and
pressures to improve competitiveness may have
limited firms’ capacity to increase wages. In the
public sector, the decline in wage growth over
recent years is consistent with an environment of
fiscal restraint. Business surveys indicate that wage
growth remained subdued in the June quarter, while
expectations for the September quarter suggest that
wages will continue to grow at a relatively slow pace.
The pace of wage growth remains subdued across
the economy, although it appears to be stabilising
in many industries. Wage growth in the mining
and business services industries slowed particularly
sharply over the past two years (Graph 5.10). This
was consistent with a larger increase in estimated
unemployment for workers from these industries.
However, more recently, wage growth appears to be
stabilising in the business services sector, consistent
with signs of an increase in employment in the
industry this year.
Over the past year, wages grew at a similar pace in
New South Wales, Victoria, Queensland and Western
Australia (Graph 5.11). While wage growth in some
2006
*
2010
2014
2006
2010
2014
1
Unemployed persons that formerly worked in an industry, as a share
of the estimated industry ‘labour force’ (including both currently
employed and former workers)
Sources: ABS; RBA
Graph 5.11
Wage Price Index by State
Year-ended growth
%
%
Western
Australia
5
5
Tasmania
New South Wales
4
4
3
3
Victoria
2
Queensland
South Australia
2007
Source:
2014
2007
2014
2007
2014
2
ABS
of these states looks to have stabilised in recent
quarters, it has continued to slow in Western
Australia, largely reflecting the downturn in mining
investment and the spillovers to other parts of
the state’s economy. Year-ended wage growth
remained weakest in Tasmania, consistent with its
high unemployment rate, while wage growth in
South Australia has been relatively strong and has
not slowed in recent years, somewhat at odds with
the continuing weak labour market conditions in
the state.
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65
Low wage growth has contributed to an extended
period of low growth of unit labour costs. The
national accounts measure of unit labour costs has
been little changed over the past two years, with
average earnings and labour productivity having
grown at around the same pace (Graph 5.12).
Domestic labour costs have declined slightly relative
to labour costs in many of Australia’s major trading
partners, suggesting some modest improvement in
international competitiveness of late over and above
the impact of the earlier depreciation of the nominal
exchange rate.
Unit Labour Costs
%
5
0
0
Average earnings per hour
5
%
5
0
0
Labour productivity per hour
1998
2002
2006
2010
-5
2014
Sources: ABS; RBA
Recent growth in labour productivity has actually
been above its average of the past decade. In part,
this has reflected the large contribution of resource
exports to recent economic growth and the low
labour intensity of resource production. However,
measured labour productivity growth has improved
over the past few years across a broad range of
industries, following a period of quite weak growth
in the latter half of the 2000s (Graph 5.13). Outside
of the mining sector, the general improvement in
productivity growth may have been in response to
heightened competitive pressures, including from
the high level of the exchange rate.
66
R es erv e Ba nk of Aus t r a l i a
0.9% pa
100
2.1% pa
1.0% pa
1.6% pa
Total
80
80
2.2% pa
Excluding mining and utilities
1994
1999
2004
2009
60
2014
Figures represent trend growth during the period shown
Sources: ABS; RBA
5
-5
1994
index
2.0% pa
100
*
Non-farm, year-ended growth
Unit labour costs
%
2009/10 = 100, log scale
index
60
Graph 5.12
%
Graph 5.13
Labour Productivity*
Producer price data suggest that over the past
year, domestic inflation pressures have remained
relatively moderate across all stages of production,
while import price inflation has picked up. In broad
terms, this is consistent with the increase in tradables
inflation relative to non-tradables inflation in the CPI,
though there are a number of differences between
producer and consumer prices that complicate such
a comparison.
ABS data indicate that the number of working days
lost per employee as a result of industrial disputes
fell in the March quarter to remain well below its
decade average. This fall was driven by declines in
the number of disputes and the average number
of employees involved per dispute, which were
partly offset by a rise in the average duration of each
dispute.
Inflation Expectations
Indicators of inflation expectations remain consistent
with the inflation target, and are generally around or
a little below their long-term averages (Graph 5.14;
Table 5.2). Since the May Statement, market
economists lowered their forecasts for inflation over
Graph 5.14
Indicators of Inflation Expectations
%
8
8
Consumer survey*
7
%
7
6
6
5
5
4
4
3
3
2
2
Indexed bond measure**
1
1
Inflation swaps measure***
0
1998
2002
2006
0
2014
2010
*
Trimmed mean expectation of inflation over the next year
**
Break-even 10-year inflation rate on indexed bonds; interpolation
used to match exact maturity
*** Expectations of average annual inflation over the next 10 years
Sources: Bloomberg; Melbourne Institute of Applied Economic and Social
Research; RBA
2014, which is likely to reflect the effect of the repeal
of the carbon price. Expectations for inflation over
2015 are little changed. Union officials’ forecasts
for inflation have risen slightly over the past two
quarters, to be 3 per cent over both 2014 and 2015.
Financial market measures of inflation expectations
were little changed in the quarter and continue to
be around their long-run averages. The Melbourne
Institute has revised the history of the trimmed
mean series of consumer inflation expectations.
This revision has increased the mean of the series
by 1.3 percentage points, although the profile of the
series remains similar to the pre-revision data. The
consumer measure of inflation expectations for the
year ahead decreased modestly in the June quarter
and remains low relative to its long-run average. R
Table 5.2: Median Inflation Expectations
Per cent
Year to December 2014
Market economists
Year to December 2015
February
2014
2.5
May
2014
2.4
August
2014
2.2
May
2014
2.7
August
2014
2.6
2.8
3.0
3.0
2.9
3.0
Union officials
Sources: RBA; Workplace Research Centre
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68
R es erv e Ba nk of Aus t r a l i a